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Fiscal regimes and fiscal sustainability in Sri Lanka

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  • Chew Lian Chua
  • Nelson Perera
  • Sandy Suardi

Abstract

This paper employs the regime-switching model-based fiscal sustainability test which relaxes the linear fiscal reaction function approach. There is evidence of a regime-switching fiscal rule in Sri Lanka for the period 1961–2017. Non-sustainable fiscal regime is identified only in two periods – 1978-1983 and 1986-1990 – while the other periods are defined by sustainable regimes. By considering the regime-specific feedback coefficients of the fiscal policy rule and the average durations of fiscal regimes, we find that Sri Lanka’s fiscal policy satisfies the No-Ponzi game condition. Nevertheless, the country’s long-term fiscal sustainability is in question given that the stricter debt-stabilizing condition is violated. Our results pose concerns for the credibility of adopting an inflation targeting framework in the absence of long-term fiscal sustainability.

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  • Chew Lian Chua & Nelson Perera & Sandy Suardi, 2021. "Fiscal regimes and fiscal sustainability in Sri Lanka," Applied Economics, Taylor & Francis Journals, vol. 53(21), pages 2384-2397, May.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:21:p:2384-2397
    DOI: 10.1080/00036846.2020.1859456
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    Cited by:

    1. Sidi Mohammed Chekouri & Abderrahim Chibi & Mohamed Benbouziane, 2024. "Public debt dynamics and fiscal sustainability in selected North African countries: new evidence from recurrent explosive behavior tests and quantile unit root analysis," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-27, April.

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